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Microsoft's Next Xbox Console

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Microsoft Corp. (MSFT) plans to reveal details about its new Xbox video game console in May, which will be powered by an Advanced Micro Devices Inc. (AMD) processor according to a report from Bloomberg. Following the news, AMD shares rose 13.10% as providing chips for game consoles will lessen the company’s dependence on the declining personal computer market.

The Xbox will use an AMD system-on-a-chip that will combine its Jaguar central processing unit with graphics chips. Microsoft will integrate the Xbox console with computers, its Surface tablet and its Windows Phone OS by combining aspects of the Windows 8 platform into all of its devices.

The gaming hardware market is currently reeling under competitive pressure from emerging social network sites and competing hardware platforms such as smartphones and tablets. Video game publishers are now inclined to make games that are compatible with these devices. Gamers are switching to these platforms or devices as they also provide free games.

Microsoft’s closest competitor in the game console business, Sony Corp. (SNE) has already announced its plans to release PlayStation 4 in time for the Christmas holidays. This makes sense as the holiday season is usually the time when demand goes up. Another competitor Nintendo’s (NTDOY) new game system, Wii U, was released last November, but the sales figures have been below management expectations so far.

Looking at the broader landscape, the next Xbox is expected to boost the lackluster hardware sales performance of the gaming industry. In the last NPD video game sales report for the month of Feb 2013, hardware sales fell 36.0% year over year to $244.2 million. This is not a one-off incident as video game hardware sales have been trending down over the past year.

However, Microsoft’s Xbox 360 was again the top-selling console with 302,000 units sold in February, much better than 281,000 units sold in January. The Xbox 360 is still the top-selling gaming console, showing its dominance over competitors like Nintendo's Wii console and Sony's PlayStation line-up.

A study conducted by DFC Intelligence suggests that the global gaming market is expected to increase from $67.0 billion in 2012 to $82.0 billion in 2017. Further, IDC expects that there will be 257 million active consoles worldwide by 2015. These estimates suggest that there are opportunities for gaming companies to increase their stakes.

The overall video game market remains highly fragmented with a large number of companies increasing competitive pressure and leading to stiff price competition. Despite competition and ongoing macroeconomic concerns, we believe that companies with a greater focus on the digital business will do relatively better even in this sluggish market.

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